Boomer’s Blog

There certainly has been no shortage of sad news about real estate lending’s havoc on the economy lately. Once-shocking news articles about soaring foreclosure rates, dramatic price drops and the Fed’s efforts to treat Wall Street’s apparent hemophilia ebb and flow with tide-like rhythms, occasionally seeming slapstick in their essence.

News stories about the bloodletting on Wall Street can permeate the real estate investor’s consciousness like a Bob Dole TV ad for Viagra: You respect the fact that it may help your operation some day … but mostly you just want Bob Dole to resume his position as a war hero, self-made millionaire, Senate powerhouse and third-person presidential candidate. Only if there were a little blue pill to cure Wall Street’s performance issues however, could the beleaguered U.S. economy rebound any time soon.

Just as surreal as the esteemed American political icon’s widely publicized bout with erectile dysfunction are this week’s musings in Fortune magazine about the economic “Doomsday” it predicts would follow the all-too-possible failures of Fannie Mae and Freddie Mac. This government-sponsored duo owns or guarantees about $5.2 trillion in home mortgages, comprising approximately half of all outstanding U.S. home loans.

Fannie and Freddie Falter
Fannie and Freddie made a face plant on Wall Street this week, prompting the New York Times to discuss how they’ve managed to squander more than 60 percent of their market value this year and how the current mortgage bailout plan under consideration in Congress, if passed, would up the ante for taxpayers should either institution fail.

IndyMac Hits the Chop Shop
In the meantime, the Wall Street Journal reports that Countrywide’s spawn, Indy Mac has begun dismantling its operation. The mortgage lender and savings bank has announced plans to cut its workforce in half and sell 60 percent of its branches to Prospect Mortgage Co. Just last year, IndyMac was the 9th largest mortgage lender in the U.S.

These folks get objective, if not gentle coverage of their business practices in the news media. But when it comes to the real estate entrepreneurs who dare to attempt to make a living cleaning up the mess that the mortgage industry made, even some of the most widely respected news outlets too often resort to inaccurate depictions of our business, scorn and now, even metaphors that seek to identify us in the Wild Kingdom.

REI’s Proud Scavengers Run Circles Around the Competition
This week, CNN had the nerve to call real estate investors “vultures.” Frankly, I resent that. Not only because, unlike the bald bird of prey with keen vision, I have hair on my head and am slightly myopic. But also because real vultures mostly prey on carcasses, and I believe that the real estate market still contains a great deal of life. Come on CNN, it’s not as though we created the problems that have led to widespread foreclosure blight in the real estate markets hardest hit by the lending industry’s lapses in sane business practices.

if we’re the economy’s birds of prey, what does that make the folks who wrote billions in bad loans that have plagued once-mighty housing markets and jeopardized the stability of the U.S., if not the global economy?

A real estate investor featured in CNN’s story had to explain to the reporter that our industry actually helps neighborhoods and property values to recover from the devastation associated with high-density foreclosures. You’ll find this paragraph near the bottom of the lengthy CNN article.

When real estate owned (REO) homes sit vacant and are neglected for extended periods of time, the investor explains, they often become havens for squatters, drug dealers and the dangerous sorts of criminal activity that prompts most qualified buyers to flee a real estate deal with Blair Witch Project-like frantic abandon.

Navigate your Real Estate Business through the Economic Abyss
Clearly, the real estate deals are out there. But in tough economic times, it is more important than ever that we make the right decisions about our businesses. A timely Inman News poll posed the following eternal question: “Which of these items are the most vital to an agent in surviving a real estate market downturn?”

The following answers may surprise you, though they confirm what I’ve been saying all along: Marketing is everything in this business. (For more information, register for a free copy of “Secret Handbook of the Direct Marketing Revolution: Strategies to Guaranteed Success for Real Estate Entrepreneurs,” the report I wrote with Dan Doran to address obstacles faced by investors in today’s often cloudy markets.) To prove my point, here are the results of Inman’s poll:

• 0% Figuring out where to distribute data for for-sale properties I have listed.
• 32% Deciding how to spend my marketing dollars.
• 25% Knocking on doors, picking up the telephone.
• 11% Investing in new technology, communications tools.
• 32% Keeping in touch with past clients.

Is REI is the Little Blue Pill for Wall Street’s “Problem”?
So, while CNN calls us “vultures” one may wonder what other investment opportunity out there is part of the solution, rather than an endorsement of our great nation’s institutional failures? With so many economic indicators pointing down, what have any of the major players in the mortgage debacle done to help neighborhoods, families and local tax bases to recover from the mortgage crisis?

Ponzi Moves on to Greener Pastures
In March, we reported that money management firm Black Rock Inc., and hedge fund Highfields Capital Management were backing a new firm to buy distressed mortgages, betting that investors would snap up bargains in the beaten-down sector. The new company, Private National Mortgage Acceptance Company, or Penny Mac, has quietly been raising capital from private investors to help borrowers restructure loans to avoid foreclosure.

Penny Mac stars Stanford Kurland, who spent 27 years at mortgage giant Countrywide Financial Corp., as its chief executive officer and Morgan Stanley Global Residential Mortgage veteran David Spector as its chief investment officer.

Housing Wire recently reported that Penny Mac currently has $2 billion in its “war chest” to buy discounted, distressed mortgages, and will fund its own in-house servicing platform. in May, Penny Mac backer Black Rock reportedly negotiated a deal to buy $15 billion in subprime mortgage exposure from UBS, the Swiss bank that has been floundering since its boom-time tango with Countrywide Financial and other problematic U.S. lenders. (Here’s an awesome article in the Wall Street Journal that touches on this issue.)

Hey CNN: If we’re vultures, what do you call the evil geniuses behind that flip?! Oh wait, CNN’s intrepid staff of crack reporters hasn’t really covered that story in much detail. Sometimes I wonder if we all wouldn’t be more in-the-loop if we got our financial news from Animal Planet.

MSNBC: Stimulus Act Offers Hidden Perks for Landlords
The new federal Economic Stimulus Act offers a provision for landlords and commercial tenants that has not yet been widely publicized. Congress has increased the amount of construction costs that can be written off in the first year for improvements on commercial or residential rental properties. With the change, landlords and commercial tenants can now write off 50 percent of “qualified leasehold improvements” in the first year alone, if the improvements are completed by the end of this year; the rest can be written off in declining increments over 15 years. In previous years, only 2.5 percent of the costs of those improvements could be written off in the first year and the declining increments spanned over three decades. The new “bonus depreciation” schedule provides faster relief by reviving the more generous depreciation rules that were in place after the turmoil that followed the terrorist attacks on Sept. 11, 2001.

New York Times: JP Morgan Feeds the Bear
JP Morgan has quintupled its offer to buy troubled investment bank Bear Stearns. The sweetened offer of about $1 billion, is intended to win over stockholders who vowed to fight the original fire-sale deal, brokered last week by the Fed. Under the new terms, JP Morgan would pay $10 a share in stock for Bear, up from its initial $2 a share — a figure that represented an estimated one-fifteenth of Bear’s going market price.

Reuters: Newly Formed Penny Mac to Feast on Distressed Mortgages
Money management firm BlackRock Inc., and hedge fund Highfields Capital Management are backing a new firm that will buy up distressed mortgages, betting that investors are ready to snap up bargains in the beaten down sector. The new company, Private National Mortgage Acceptance Company, which will be known as PennyMac, plans to raise capital from private investors and will help borrowers restructure loans to avoid foreclosure. Penny Mac will star Stanford Kurland, who spent 27 years at mortgage giant Countrywide Financial Corp., as its chief executive officer and Morgan Stanley global residential mortgage veteran David Spector as its chief investment officer.

U.S. News and World Report: Fed Frees Mac to Supersize Mortgage-Backed Value Meals
A week after restrictions were eased on Fannie Mae and Freddie Mac to allow them to gobble up a minimum of $200 billion in mortgage-backed securities, the federal home loan banks have been freed to follow suit.

Forbes.com: Bank of England Snubs Mortgage-Backed Securities from Ailing Banks
The Bank of England has rejected pressure to follow the U.S. Federal Reserve in buying beleaguered mortgage-backed securities from banks that have been hard hit by the credit crisis.

Bloomberg: Existing U.S. Home Sales Rise In February
In defiance of many analysts’ predictions, existing home sales rose in February for the first time in more than six months. For some, his unexpected spike in activity eases concerns that credit restrictions and falling prices would diminish market demand.